[Answered] Many state governments are switching back to Old Pension Scheme (OPS). Do you think that OPS is bad for economics? Give reasons in support of your argument.

Introduction: Contextual introduction.
Body: Write significance of Old Pension Scheme with respect to economics. Also explain why it is bad for economics.

Conclusion: Write a way forward.

The Old Pension Scheme (OPS) offers inflation- and pay commission-indexed pension payments to retired government employees and their spouses (after the employees’ death) without any contribution from the employees.  Under Old Pension Scheme, employees are not required to contribute to their pensions and pension was guaranteed.

Economic significance of Old Pension Scheme:

  • Short-term gains by Government: They save money since they will not have to put the 10 per cent matching contribution towards employee pension funds.
  • Advantage for employees: It will result in higher take-home salaries, since they too will not set aside 10 percent of their basic pay and dearness allowance towards pension funds.
  • The pension drawn in New Pension Scheme (NPS) is lower than the OPS.
  • NPS is dependent on the market prices of equity/bonds in which the amount is invested. Therefore, a crash in the markets can affect the pensioners.
  • OPS is a fixed government expenditure irrespective of an economic slowdown or a stock market crash. This makes it useful in counter-cyclical policy measure during a crisis.

Bad for economics:

  • Pension Liability Remained Unfunded: There is no corpus specifically for pension, which would grow continuously and fund for pension.
  • Inter-Generational Equity Issues: Current generation of taxpayers are paying for pension bill of those who joined government service before 2004 but are contributing to the 10 percent contribution the state governments have been making for those who joined from January 1, 2004.
  • Unsustainable: Pension liabilities would keep hiking since pensioners’ benefits increased every year; like salaries of existing employees, pensioners gained from indexation.
  • Burden on Exchequer: Over the last three decades, pension liabilities for the Centre and states have jumped manifold. It accounts for 25% of the States’ budget.

The pension scheme needs to be reformulated in a way that it provides benefits to employees without putting an onerous burden on the employers.

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